Carried Interest, Pari Passu Preferred workout. In this workout, we will calculate the total distribution to the limited partners and the general partners. We will assume that the preferred investments are pari passu, which means that they are treated the same until the preferred hurdle is met. In this example, we have an investment of 100, an LP investment of 95% of that, a GP investment of the remaining five. We have a five-year exit with a equity value of 212 at exit. The hurdle rate is 8% on the preferred. Again, that will be paid equally to both investment groups. The carried interest will then be calculated at 20% for the GP. So, the initial investment will be the 100, and that will be a negative. We have no annual distributions until year five, when the asset is sold, and the equity value is the 212. For the LP return, that is going to be the initial investment times the pro rata, 95% for the LP, times one plus the hurdle rate of 8% raised to the fifth year. And the labels here are actually numbers. They're just coded as years, so we can't reference them. And that's going to be raised to the five, and that gives us a return of -139.6. Now, what I want to do here is I actually want to make sure that if this is not a good deal, that we don't actually overpay, so to speak the LP or the GP. So what I'm actually gonna do is I'm gonna wrap this in a min, and the way I'm going to do that here is I'm going to do a minus min, and then because that's already showing as a negative, that return was showing as a negative, I'm gonna flip that so that it shows as a positive, and then I'm gonna offset that against the exit proceeds times the pro rata share. Because they're pari passu, we can set that against the pro rata share and that's going to then give us the 139.6 again. But if for example it was a very bad deal and there was only let's say 125 of exit proceeds, they would only get 95% of those. So I will put that back, and now I've gotta do the same thing for the GP. Copy that formula out to the right, and these formulas, of course are showing as well on the full example, which is downloadable. So the GP investment will then be equal to the minus min of the opposite of the initial investment times the pro rata invested share of 5% times one plus the hurdle rate raised to the five compared to the exit proceeds times the pro rata amount.

And that gives us a -7.3. And again, I'm showing the negatives here because this is a waterfall and I want to show how the profits are being distributed. So ultimately we will get down to zero profits which means that they've all been distributed. So I can sum these up and that gets me to remaining profits of 65.1. And what we have to do now is turn our attention to the carried interest, and that's simply going to be the remaining profits times the 20%. And again, I want to take that and I wanna make it negative. So I have 13 being paid to the GP. The remaining profits will be the difference, or if we wanna do the math, the profits that we begin with times one minus the 20%, showing that the LP gets 80%. And again, I have to flip that to a negative. And if I sum up those items, I get to a zero, showing that we've paid out all of the profits. So let's see how this looks in terms of the return, in terms of the multiple of money, and in terms of the ending split of the profits. So for the returns, the LP return is going to be the exit proceeds, and I'll anchor the row there so I can copy that down, times the pro rata investment of 95.

And then if I anchor the pro rata investment for each investor group, I can go ahead and copy these across at least through year four. And that's just basically just showing that they're getting 0%, they're getting zero distributions each year. In terms of year five, we have to take the opposite of the sum of the various components for each group. So the two LP returns are the preferred return and then the remaining interest after the carried interest. And for the GP, it's the preferred return and the carried interest.

And those two should add up to the overalls for the deal, which are 100 and 212 out. We can simply take the IRR of each of those streams, and that shows a return for the LP of 15.1, a return for the GP of 32.4, and 16.2 overall. I'll also put my formulas out here as well.

And in terms of the multiple of money, that's going to be the exit proceeds over the opposite of the entry amount, and I can copy that down as well.

For the LP split, we take the LP total return over the total deal return. And for the GP return, we take the total GP return over the total deal return and that gives us the total splits for the transaction.

And that shows us how the profits were divided overall, even including the carried interest of 20%. So we've calculated the total returns to the GPs and the LPs using a pari passu preferred instrument along with a 20% carried interest.